When markets fall down: are emerging markets all equal?

This paper studies the dynamics of stock market regimes in emerging economies. More specially, we show that it is incorrect to treat emerging markets as a single homogeneous group of markets because there is strong evidence for substantial differences in their regime-switching dynamics. For our analysis, we used a mixture or latent class version of the standard regime-switching model which classifies the analyzed emerging markets into three types of clusters. Whereas each of these three types of markets is characterized by the same two regimes – a bull state with positive returns and low volatility and a bear state with negative returns and high volatility – they clearly differ with respect to their regime-switching dynamics. The first class of stock markets moves fast between the two regimes, the second class shows more regime persistence, and the third class shows less likely than the others to switch to a bear regime period. There turn out to be no relationship between having a particular of these three types of regime-switching dynamics and regional characteristics of the economy concerned. The last part of the paper addresses regime synchronicity. We show that even though emerging markets exhibit some regime synchronicity that does not rule out presenting different dynamics in the regimes. JEL classification: C22, G15